Exotic Preferences for Macroeconomists

Backus, David; Routledge, Bryan R.; Zin, Stanley E.

doi:10.3386/w10597

Cited by 65 publications

(25 citation statements)

References 94 publications

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“…To see what the concern is, consider the following example adapted from Backus et al (2004). Consider a simple model with three periods ( = 0 1 2) and in which-in each period-only two states are possible, from the set Ω = {1 2} This is obviously a standard binomial tree with three dates and a total of four final possible nodes.…”

Section: Dynamic Representations Of Ambiguity-averse Preferences and mentioning

confidence: 99%

“…Therefore, under recursive MPP the optimality conditions take the form of inequalities, just because  (·; ) is generally non-differentiable, unless the correspondence  : Ω → (Ω) is a probability kernel (unless there is no ambiguity). 50 In general, these Euler "inequalities" are satisfied by a non-singleton set of prices, so that the equilibrium is not unique when for some :…”

Section: Dynamic Asset Pricing Modelsmentioning

confidence: 99%

“…, the convenience of a continuous 50 In the standard (S)EU case, () is made of a unique probability distribution, say , so that max…”

Section: Chen and Epstein (2002) Have Further Generalized These Resulmentioning

confidence: 99%

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Ambiguity in asset pricing and portfolio choice: a review of the literature

2012

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A growing body of empirical evidence suggests that investors' behavior is not well described by the traditional paradigm of (subjective) expected utility maximization under rational expectations. A literature has arisen that models agents whose choices are consistent with models that are less restrictive than the standard subjective expected utility framework. In this paper we conduct a survey of the existing literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. We conclude that the ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the empirical failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free rate puzzles, and the occurrence of trading break-downs.JEL codes: G10, G18, D81.

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Section: Dynamic Representations Of Ambiguity-averse Preferences and mentioning

confidence: 99%

Section: Dynamic Asset Pricing Modelsmentioning

confidence: 99%

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Ambiguity in asset pricing and portfolio choice: a review of the literature

2012

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“…Backus, Routledge, and Zin (2004) provide a complete survey. For adopting one of these utility models to change our findings, one would need to find (a) changes in the predictions for unconditional mean interest rates on bonds that (b) are driven by a macroeconomic moment that shifts during GMs.…”

Section: Recursive Preferencesmentioning

confidence: 99%

Great Moderation(s) and US Interest Rates: Unconditional Evidence

Nason¹,

Smith²

2008

The B.E. Journal of Macroeconomics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier 1946 moderation in output and consumption growth was comparable to that of 1984. To assess the impact of these moderations, we also isolate the 1969-83 Great Inflation using quarterly data since 1947. We then examine the quantitative predictions of a consumptionbased asset pricing model for shifts in the unconditional average of U.S. interest rates across these time periods. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth. Terms of use: Documents inJEL classification: E32, E43, N12

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“…For this purpose, we carefully differentiate between a demand for liquid assets while waiting for new information 1 and a demand for safe assets for precautionary reasons. Using a simple three-period setup, existing literature demonstrates that additional demand for liquid assets such as fiat money, public bonds, bank deposits, and inside bonds emerges when risk-hedging devices are lacking, or available only with high transaction costs.…”

Section: Introductionmentioning

confidence: 99%

Risk Premiums versus Waiting-Options Premiums: A Simple Numerical Example

Miyazaki

Saito

2009

The B.E. Journal of Theoretical Economics

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This paper investigates how interest rates on liquid assets and excess returns on risky assets are determined when only safe assets can be used as liquid assets when waiting for an informative signal of future payoffs. In particular, we carefully differentiate between a demand for liquid assets while waiting for new information and a demand for safe assets for precautionary reasons. Employing Kreps-Porteus preferences, numerical examples demonstrate that larger waiting-options premiums (lower interest rates) emerge with higher risk aversion in combination with more elastic intertemporal substitution.

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Exotic Preferences for Macroeconomists

Cited by 65 publications

References 94 publications

Ambiguity in asset pricing and portfolio choice: a review of the literature

Ambiguity in asset pricing and portfolio choice: a review of the literature

Great Moderation(s) and US Interest Rates: Unconditional Evidence

Risk Premiums versus Waiting-Options Premiums: A Simple Numerical Example

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